Fri, Jun 20, 2014 
By Steve Cinelli CFB contributing editor,
By Steve Cinelli CFB contributing editor,
There has been a long debate in the media industry as to where lies the power. Whether in music, television, books, news or movies, the proverbial query is who has the clout - content owners or distributors? Distribution, with accelerating reach and scale economies, may enjoy the negotiating power over rights and costs from owners, particularly in an environ of social media, with platforms like Twitter, Facebook, Netflix and YouTube. Yet content, in a world of unique and limited substitute offerings, can still command the stage, respect and compensation. The quality of content, the receptivity and connection with the observer yields a deeper essence. But the lines have and will continue to blur between the importance and role of both, particularly as business models evolve, technology intercedes and so the conversation moves on.
This analog, I submit, is spot on to the nature of the crowdfunding movement. So far, tremendous levels of near hysteria on the advent and growth of what is construed as a new form of finance. I say poppycock. Simply the business of finance, as an art and science, remains in situ. A user of capital conveys to a supplier of capital requisite information for such supplier of capital to decide to deploy such capital to such user, with the supplier, hoping to put up X and receive back X+. The merits of what represents a worthy investment still lies in essential characteristics – business thesis and need, management teams, market sizing and conditions, proper valuations and expectations on both parts, business and revenue models, competition and a bit of good fortune, i.e., when skill meets opportunity. To manifest a dream, various resources are needed, capital generally being one. How it’s structured and deployed, and how it performs is still resolute.
The crowdfunding mechanism is about distribution. In the days of old, private (unregistered) financing consisted of authoring a physical “book” aka private placement memorandum, which, containing the relevant information was sent to select investors, numbered of course, with follow up via phone, facsimile, or in person. Very analog. Very inefficient. While the “book” remained the constant, the conversations were tautological, and to some degree, personal, given the discourse with the would-be investor. Over the course of weeks and months, even years, one would fill the financing target, and all would be fabulous. Or not.
Welcome to the world of the Internet and digital communications, i.e., the ability to share information broadly, in many forms, and simultaneously. In 1999, at OffRoad Capital, we recognized that there was a much more efficient model of communicating to investors, i.e., via the Internet, by telling the story “singularly to a plurality”. And unlike investing in public companies, with reams of historical trading information, “privates” generally were virgin offerings, with a craft of storytelling. So we created a virtual environment to tell and share the story. We distributed the story in many ways, whether script, or pictures, or video, even providing live telecasts of management presentations and connecting our investors via phone bridges. Yep, pre SKYPE and pre-YouTube. We could provide a more robust and engaging experience to the investor than through a “book” and a phone. Means of technological distribution enabled efficiency and engagement, and even the ability to aggregate smaller levels of capital into a larger sum. No one could fathom doing a small offering with thousands of investors in an analog world, as it would be more mind numbing than herding cats. Technology enables in many ways.
But this still remains a finance game, where wins and losses are quantified in investment results, and for those conveying the “stories”, while efficiently shared, still have a responsibility to produce “appropriate content”. Said differently, I believe it crucial for those engaged in crowdfinance to bear the writer’s and editor’s pen and make sure that the story is told to engage, to educate, to enable, to elicit and to encompass all which an investor requires to make an informed decision. As Title III of the JOBS Act remains in limbo, securities-based platforms cater exclusively to the “accredited investor” (Regulation D, Rule 506c), which was a designation from which small companies might raise funds sans the cost of full-blown registration. The historical premise was that this group had both the ability to absorb losses, but also had the financial wherewithal to engage in their own, deeper diligence on a proposed offering. We generally lose sight of this latter premise, and intermediaries, be them analog bankers or crowd platforms, do have a responsibility to provide rich “content” in support of the investment thesis they are presenting.
In a review of offerings from various platforms in the US and EU, I believe we need to develop some standards of financial disclosure, i.e., content, if we hope for this industry of distributed finance to blossom into all of our desires and expectations. While we can lament generally about the lagging literacy and numeracy levels in the US, the degree of financial literacy is even more trammeled. Is it incumbent on the crowd industry to enable informed decision-making and provide a financial plenary that guides the reader/investor into how to really assess the investment, how numbers and values work (or don’t work), contributing to what the investor is striving for - an attractive return? While many companies rendered to the market are very early stage, and investors believe that products and brands and markets do create value, the measure of such is still financially represented. Thus, should we not just recognize we have the responsibility to financially display while we disclose, but we may also, in this moment of time, embrace the opportunity to financially educate?
I do believe that while still in a nascent industry, the platforms that will survive will be those that provide their investor audiences both comprehensive and understandable financial disclosures, while educating such audiences on how to “decipher” along the way in building investment discretion and skills. And in so doing, the smarter and more active investors will gravitate to those platforms that show the competence and elegance of disclosing, while educating, such information for a much advanced investment experience.
Steven Cinelli is founder and CEO of Primarq and host of weekly webcast the crowd caucus stevec@primarq.com
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